Ion Geophysical CEO Hosts Business Outlook Call - Conference Call Transcript

| About: ION Geophysical (IO)

Ion Geophysical Corporation (NYSE:IO)

Business Outlook Call

December 09, 2011, 10:00 a.m. ET


Jack Lascar - IR, DRG&L

Bob Peebler - CEO

Brian Hanson - President and COO


James West - Barclays Capital

Daniel Burke - Johnson Rice & Company

Thomas Plumb - SVA Plumb Financial

[George Gaspar] - Private Investor

James Evans - Collins Stewart


Ladies and gentlemen, thank you for standing by. Welcome to the ION Geophysical Outlook Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions and instructions will be given at that time. Today’s conference is being recorded December 9, 2011.

I would now like to turn the conference over to Jack Lascar of DRG&L. Please go ahead.

Jack Lascar

Thank you, Alicia, and good morning and welcome to ION Geophysical Corporation’s market and business outlook conference call. We appreciate you joining us today. Your hosts are Bob Peebler and Brian Hanson. And before I turn the call over to management, I have a few items to cover. If you would like to be on our e-mail distribution list to receive future news releases or experience a technical problem receiving any news release, please call DRG&L at 713-529-6600 and let us know.

If you would like to listen to a replay of today’s call, it is available via webcast by going to the Investor Relations section of the company’s Web site at or via a recorded instant replay until December 23. Information reported on this call speaks only as of today, December 9, 2011, and therefore, you’re advised that time-sensitive information may no longer be accurate as of the time of any replay.

Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control, that may cause the company’s actual results or performance to differ materially from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filing with the SEC, including in its Annual Report on Form 10-K and its quarterly report on Form 10-Q.

I will now turn the call over to Bob Peebler.

Bob Peebler

Good morning and welcome to our market and business outlook call. We’ve recently completed our planning for 2012. The purpose of this call is to share with investors our macro assumptions and the key elements of both our three-year to five-year models and our 2012 outlook. As in the past, we do not plan to give specific earnings guidance, but we do want to provide the investment community with the opportunity to better understand our view of the markets, where we operate, our growth plans within those markets, and sufficient business information to help you understand how ION expects to grow in that environment.

Our planning process has two phases. First, we take a look out three years to five years which includes our assumptions about the macroenvironment that may impact our business with emphasis on oil and gas demand, future commodity price trends, and at the detail level, our assumptions on how those macro trends may play out in the geophysical industry for both land and marine activity from oil company and contractor perspectives.

Once we had the macro landscape assumptions, we then review our strategy to adjust, as needed, for market and credit forces and also reflect our actual performance compared to what we had planned in the previous year. The next step is to review in detail our investments, both R&D and our portfolio of current and potential new businesses that surely support our long-term strategy for the company.

After we’ve completed this first phase, we then develop the operating plan for the next year within the context of our long-term strategy and how we may look to change the shape of our business to our portfolio investments over time. I will now give you our macro view and related assumptions and then Brian will do a deeper dive into each of the business units and also a consolidated view for the company.

I will start with the discussion of energy demand and our assumptions over the next several years. We draw our conclusions from what have been written by analysts, the International Energy Association, and our own personal observations and input from our contractor and oil company customers.

My first comment is that we, along with many in our industry, have been somewhat surprised as to how strong the oil markets have been when considering the challenging global economic conditions. But when we dig deeper, it is clear to us that we’re likely still in the middle of a positive energy demand cycle, and both oil and gas remain critical components of the world’s energy supply for the foreseeable future.

We believe the following factors will likely keep oil prices in a current trading range of $80 to $100 per barrel or even higher over the next five years. First, the world has only 2% spare capacity, which is razor thin when considering a turmoil in North Africa and the Middle East. We enter 2012 with as much uncertainty as I have seen in the Middle East and North Africa since the turbulence in the 1970s. Iran is the extreme wild card that appears to be progressing to some form of showdown during 2012. This uncertainty will likely continue to put a risk premium on oil prices.

Second, the aggregate natural decline of the large oil reserves around the world is approximately 10% and has been slowed to 5% to 6%, thanks to new technologies designed to extend the reservoir life. The pace of reinvestment will need to increase just to keep the actual decline in the 5% to 6% range. With oil production at approximately 85 million barrels per day, we’re looking at the need to discover and bring online approximately 5 million barrels a day just to keep even. This number may be compounded by increasing demand as we will discuss later.

In addition, the non-OPEC companies are struggling just to maintain production and short-term data would suggest that in aggregate they are not keeping up. For example, out of the top 16 IOCs, 14 experienced declines in production in the second quarter of 2011, that in aggregate represented 1.2 million barrels per day. Even the large non-OPEC companies such as Russia’s LUKOIL and China’s Sinopec also experienced declines.

The remaining oil reserves are proving harder to find, as reflected in the ever decreasing number of large discoveries and requires increased technology sophistication. And access is a big problem for IOCs in many the non-OPEC nations. Also, even with projected declines in oil consumption in the developed countries, the developing countries led by China are more than offsetting those declines, even assuming aggressive conservation and renewable progress.

And finally, when we consider the social cost to maintain stability in places like North Africa and the Middle East, it appears that $80 per barrel is the needed price for which has gone up approximately $20 per barrel over the last few years. Therefore, we assume that oil prices will remain high to support continued frontier exploration in deepwater, the Arctic and hard to reach places.

We’re also assuming that the gas markets, due to the shale plays, are one of the prime growth markets for the IOCs. And most of them will continue to invest heavily in North America and other parts of the world as the shale gas market evolves. However, since we are assuming gas prices will continue to be in the under $6 range over a five-year plan period, we believe that there will be increased pressure on all companies to find much more productive ways to locate, complete and produce shale gas.

The moderately high oil prices and the growth opportunities in gas bode well for the E&P services than technology sector, including the geophysical category, as oil companies continue to push in the frontier areas and also focus on reservoir characterization to get more oil and gas out of the existing reservoirs more efficiently.

The following are our view of activity in the seismic sector. In marine, we expect seismic spending by oil companies to increase 8% to 11% in 2012. The seismic fleet is projected to grow from 125 vessels in 2011 to 150 vessels in 2016 and 23 out of the 25 vessel increase will likely be 3D. We also expect both streamer count and length to continue to increase over the next five years.

2011 marine supply is estimated to be within 5% to 10% in balance with demand. In 2011, operators are expecting 10% to 15% price uplift. Seabed also appears to be a growth market. For example, seabed oil company spend increased 150% from $420 million in 2006 to $1.4 billion in 2011. The seabed market is highly elastic. And if survey cost come down compared to streamer; we believe, the seabed market will continue to expand.

The market is also being driven by the need for higher resolution for reservoir exploitation. Within that context, we’re also seeing rapid growth in recording the full wavefield on the seabed. In addition, efficiencies are being driven by new generation ocean-bottom systems, which include more productive cable systems and nodes.

In land, we expect over the plan period to see significant increased spending by the large IOCs and NOCs in the shale plays. This has already happened in the North America and will likely move into Europe, China, and other parts of the world. The wildcat is environmental concern the wild card is environment concerns that will likely slow the future in Europe. These concerns would tend to promote the need for technology breakthroughs to find more efficient ways to locate and produce and also more efficiently use and reuse water.

In North America, we also expect an increase in heavy oil activity as a Canadian tar sands, which will also benefit from increased technology and full-wave activity. Related to land acquisition, full-wave is appearing to play a more important role and is growing, including in the shale plays. In addition, channel/station count, which represents recording stations owned by contractors, is projected to grow from 3.6 million in 2011 to 5.9 million in 2016, a compounded growth rate of 10% to 11%. This increase has been driven by the need for higher resolution and larger surveys.

We expect the land equipment market to grow from approximately $750 million in 2011 to $1.5 billion to $1.8 billion in 2016. Land has still not made a full recovery, but very large contracts have been negotiated in the Middle East and North Africa. Unless additional turmoil breaks out, it’s expected that activity in North America and the Middle East will increase in 2012. We also believe that there’s still an oversupply of crews in land and some consolidation should be expected.

In summary, we believe we’re in an expanding exploration cycle driven by the need to meet the growing international energy demand, which bodes well for the geophysical and seismic industry. Shale gas will continue to grow its share in the energy mix which creates significant opportunities for both oil and gas companies and service and technology companies.

We believe that frontier exploration is where much of the E&P spend will be aimed, including in the Arctic and the international areas. We believe that land seismic is recovering and will be positively impacted by increased stability in key countries, in the Middle East and North Africa, and return of higher activity in Russia.

In summary, our overall assumption is that we’re in a growing and robust geophysical market. I will now turn it over back to Brian for his comments.

Brian Hanson

Thank you, Bob, and good morning, everyone. I’d like to spend some time discussing the three-year to five-year time horizon, specific to our businesses, and then wrap up with some of the highlights for 2012.

At the highest level, over the next three years to five years, we will continue to implement our strategy of integrating the whole of ION’s capabilities to solve the difficult geological challenges that oil and gas companies are facing to keep up with the growing energy demand. We have our traditional equipment businesses in marine and land via our BGP joint venture while at the same time we plan to more rapidly grow our GXT data processing and GeoVentures’ multi-client businesses over the period.

We also plan to stay on our asset light strategy with a majority of our capitals used for R&D, computing infrastructure and to support our GeoVentures’ multi-client projects. This strategy positions the company nicely as a technology company with increasing revenues coming from the oil industry facing parts of our business, which would include GXT data processing and GeoVentures.

With good execution, we expect this approach to create a pull-through with our new technology systems business as the contractors who perform our survey work are also our customers and will need to acquire our specified equipment and perform the surveys. Our expectations are that this strategy will likely result in our revenues approximately doubling in size in three years and tripling in five years with two-thirds of the future revenues coming from oil companies and one-third from equipment sales to contractors.

For the next three years to five years, we’re expecting to concentrate our areas of focus in the four key market segments. First, challenging environments such as shooting seismic in the Arctic. We’ve developed a leading reputation for performing successful surveys in the Arctic, including programs in the Beaufort Sea, Greenland, and most recently, a scientific study in the Russian High Arctic. We see the Arctic frontier as an area of tremendous potential for several years to come with estimates of over 25% of the remaining oil and gas to be found in the Arctic.

The second area is in complex and hard to image geologies, for example, the deepwater subsurface salt in the Gulf of Mexico, West Africa and Brazil. GXT has a leadership position in depth imaging, including reverse time migration. And we expect those technologies and the related markets to be significant over our planned period.

The third segment is unconventional reservoirs. Over the years, we have gained significant experience in China where our technology has been successful and unraveling deep fractured type gas sands. We’re currently developing our offering in the North American oil and gas shale plays with a solid start in 2011 with approximately one-third of our GeoVentures’ capital spend being on land and shales.

Our goal is to have a highly differentiated shale offering, which we call ResSCANS, centered around unique measurements, such as recording the full wavefield and also proprietary processing. We expect shale plays to move around the world with North America continuing to drive innovation. ION is well positioned to participate as the play migrates to other parts of the world, likely Europe next.

The fourth segment is basin exploration, which is our legacy multi-client business. Frontier exploration starts with a regional understanding of the geology and that is where our BasinSPANS have being so successful. This business started in 2003 with our GulfSPAN in the Gulf of Mexico and has grown over the last several years to an extremely robust data library that covers many of the frontier basins in the world, including such hot spots as East and West Africa, Brazil and the Gulf of Mexico. We expect the BasinSPAN business to be a significant revenue producer over the next several years.

I’d like to speak more about our GeoVentures group, which rolls up into the Solutions’ revenue segmentation and is the tip of the ear for ION Solutions strategy. Our strategy is not to compete in everyday 2D or 3D multi-client spec shoots. Rather by focusing on the toughest reservoir imagining challenges, we can bring the significant technical capabilities we have within ION.

For example, including our INOVA joint venture, we have over 500 technical people, including geophysicists, geologists and software, electrical, mechanical and reservoir engineers. By focusing this talent on solving specific oil company challenges, we can build highly differentiated offerings. In the Arctic, our data processing group develop proprietary algorithms to remove the noise created by the ice. Our marine equipment group help design proprietary equipment to enable towing below the ice and our concept software group modified their command and control software specific to the operational problems encountered in acquiring data in the Arctic.

As we expand the portfolio of the GeoVentures business within the context of our Solutions approach, we believe that its growth rate will exceed that of the other business units and should more than triple in size over the next five years. As mentioned, this expansion will result from the broadening of our portfolio with ResSCANS, aimed at the shale plays, and continuing expansion of our BasinSPANs, with the Arctic as a key strategic area of focus.

We also believe that as we broaden our portfolio, our business will tend to become less back-end loaded with a more balanced revenue stream throughout the year. We expect due to our technical approach that we will see gross margins in our GeoVentures business improve between 20% and 30% within the five-year plan period. It is important to note, as we have pointed out before, that there is a strong correlation between our capital program spend and actual new venture revenues recognized in the year. More on that later as it results in 2012.

Data processing is the other part of the Solutions segment revenues. With the exception of 2011, this business has consistently grown between 20% and 25% per year. As we have mentioned in the past few earnings calls, revenues this year were impacted by the reduction in activity associated with the unfortunate events in the Gulf of Mexico last year, resulting in a decline of the business of approximately 15%. This business was originally 100% marine-focused and performed all its work in the Gulf of Mexico. Over time, we developed a strategy to branch out internationally and also move into land processing.

In mid-2010, approximately two-thirds of our data processing revenues came from the Gulf of Mexico. By mid-2011, we had filled half the void created by the reduction of activity in the Gulf with increased international revenues and shifted the mix of Gulf of Mexico business from two-thirds to one-third. Today, we have data processing centers operating in Brazil, Trinidad, Nigeria, London, Moscow and Egypt. And we expect to continue this geographic expansion.

In addition, we’ve typically performed in the high-end marine data processing market with an emphasis on depth imaging. But we believe we can significantly expand our DP market by moving into the land market with growing expertise in the shale plays and also by leveraging our global footprint through participation in some of the higher end pre-stack time markets. We continue to spend heavily on R&D in our data processing business and continue to see acceleration in the imaging problems for oil companies.

We expect to return to normal capacity in 2012 and we expect data processing growth rates to return to historical levels of 20% to 25%. For 2012, we expect data processing gross margins to return to 2010 levels, but then experience a two to three margin point decline over the five year horizon, as we expand globally and into more price-sensitive markets on land.

Our Systems segment is now primarily comprised of our marine equipment business, although we do have our sensor geophone business included in this segment. The overall sensor business tends to be driven by price. Although we’ve worked diligently to relocate manufacturing to low cost areas in China and India and although our sensor geophones continue to be recognized as the premier brand, we see this as a low margin business for some time to come. The good news is that this is also a low overhead business, so increasing volumes can lead to much improved financial performance, which we expect starting in 2012.

During the last two years, sensor geophone volumes have been down as the land equipment business has been slow. However, we anticipate that revenues should improve 50% in 2012, returning to 2009 levels, and then slowly improve each year thereafter. Generally, compared to our other businesses, we do not plan for a sensor geophone business to be a significant contributor to our overall operating income in the future.

The marine business is positioned very well to more than double in size over the next three years to five years. As the total number of active vessels has grown substantially over the years, our marine business enjoys a healthy and growing repair and replacement business, which provides a nice, stable revenue and earnings stream.

Looking forward, we see long-term growth being driven by a turn of technology in both the towed streamer markets and the seabed markets. The driving of new frontiers such as deepwater Brazil, the Gulf of Mexico, and West Africa has resulted in an exponential increase in the amount of seismic data being collected over the last 10 years. This has driven more vessels, more streamers in the water, and more complex surveys, which has created the need for much more sophisticated towed streamer systems.

In addition, as Bob mentioned, we’re seeing a rapid increase in seabed activity. Mainly in very large projects of already discovered wells have often producing fields where the oil companies are going for much more detailed reservoir characterizations. These trends have set the marine market up for a complete turn of technology for both towed streamers and seabed where examples such as PGS GeoStreamers, Fairfield nodes, and CGMP broad size are just the beginning of this major evolution in technology.

We believe that ION is well positioned to take advantage of these trends with our version of next generation integrated platform for towed streamer and a new generation ocean-bottom cable VSO system that has a much lower system cost and will support much deeper operations than our original VSO system. We expect that our gross margins will remain relatively flat in our marine equipment business over the five-year plan period.

The Software segment is comprised of our Concept Systems business, which primarily provides command and control software to marine seismic vessel operators to enable them to perform seismic surveys. A couple of years ago, we launched the Orca software platform and shifted the revenue model from selling software to a subscription fee basis, which creates a good recurring revenue stream. Today, growth is driven by the conversion of the fleet from an older product concept sold called Spectra to Orca.

To-date, we have converted 50 of the approximately 125 vessels in operation. Future growth will be driven from the additions of vessels and continued conversion of vessels, as well as adding functionality to the offering, branching out beyond traditional command and control platforms. Concept has significant technical expertise, which we believe has applications beyond seismic marine vessels. And as such, we believe we can double the size of this business over five-year period while maintaining quality software margin rates.

Although not a contributor to revenue due to our minority ownership of 49%, our land equipment joint venture, INOVA, does contribute to our bottom line. The land seismic equipment market has remained slow through 2011, but we’re seeing signs of recovery. Certainly, the events in the Middle East and North Africa sure didn’t help by forcing many cruise to shutdown.

Our most current estimate is that one-third of global land cruise remains stacked with many of those located in Russia, China, and the troubled areas in North Africa and the Middle East, such as Libya. We do believe we’re seeing a slow recovery and INOVA has positioned itself well for the improving land markets by launching the next version of FireFly, DR31; a new autonomous node system called Hawk; and a new smaller version vibrator truck called UniVib.

We believe that INOVA’s business will breakeven in 2012 and then over the next five years grow past pre-2008 levels, up $400 million to become the market leader. BGP support, particularly in penetrating in Middle East, is an important component of this expected growth. In addition, as product mix changes in 2012, we believe that gross profit rates in INOVA will improve 50% followed by sequential improvements each year thereafter as mix and volumes drive manufacturing leverage.

Now, I’ll move to some of the more specific highlights for 2012. First, our overall assumption for 2012 is that the world will not slip back into a recession and that oil remains above $80 a barrel. We believe the Gulf of Mexico activity levels will continue to rise, although not back to pre-Macondo levels and we assume the Middle East and North Africa will see increasing seismic activity. Although today, it is not our intention to give guidance on revenues and earnings, I will speak to some of the more transparent elements of our business.

We see 2012 as a year of growth across all of our businesses. In addition, with the increase in activity of GeoVentures’ land projects we expect our earnings to be less skewed to the back half of the year as compared to 2010 and 2011, as we anticipate approximately one quarter or more of our annual earnings to be in the front half of the year.

We believe the data processing business will have recovered from the decline in 2011 and will grow at normal historical levels as mentioned before. 2011 was a good year for the GeoVentures group and we expect 2012 to be strong as well, as we continue to grow our ResSCAN offering shales and our other offerings around the problem areas we discussed earlier.

CapEx, which is highly correlated to new venture revenues, as mentioned on our last earnings call, is expected to be in the range of $130 million to $150 million for 2012. Data library revenues are very difficult to predict, but suffice it to stay, the portfolio has never been so robust and all indications are that oil company CapEx budgets are rising from 2011 levels which is a good indicator. For the marine business, in addition to a growing repair and replacement business, we expect to sell at least two large ticket systems, either towed streamer or OBC in 2012.

During 2012, we would expect operating expenses to remain flat as a percentage of revenue, interest expense to be in the $4 million to $7 million range, and our effective tax rate to be between 22% and 25%. Before opening up the call for questions, I would like to once again reiterate that our intention is not to be giving guidance for 2012 and I apologize in advance for not answering 2012 guidance related questions.

With that, we’ll open up the call for questions.

Question-and-Answer Session


(Operator Instructions) And our first question comes from the line of James West with Barclays Capital. Please go ahead

James West - Barclays Capital

Guys, where in, as you look into 2012 on your R&D budget, what are the key R&D initiatives you have underway, maybe not just for ‘12, but also as you think about your three to five year outlook, where are you focusing most of your R&D efforts, maybe the top maybe two or three places?

Bob Peebler

James, this is Bob. Obviously, one key area is in support of the shale play, so we want to have a highly differentiated offering in the shale play and part of that is R&D that is in all areas that touch it, not only the major, but itself; but, also as importantly, having proprietary processing and even interpretation in the shale. So, we’re putting a lot of sort of cross group effort in the R&D plan.

Another important area is in the marine, both the marine platforms as Brian mentioned, we really do see a whole another turn of the crank both on seabed and on streamer, sort of streamer systems. And so, we have a fairly significant investment also in that area. I’d say on the INOVA side, a much of what they’re now spending will be in support of the new products. I mean, we’ve done a lot in getting the products to the point they’re at. But, as you know they’re new products, so they’ll have a lot of go forward cost just to keep those products growing as they get feedback from customers.

James West - Barclays Capital

Okay; that’s helpful. And then just a follow-up, Bob, in your earlier comments, you mentioned as you guys went through your three to five year outlook, you also took into consideration the competitive threats in the market, and I wonder if you could articulate what you see is the biggest threats to your business over that three to five year timeframe?

Bob Peebler

Well, anytime you go through the new technology cycles, once [Brad] are you on the right horse and obviously we believe we have a really strong platform of technology to build off of; but, three to five years is quite a period of time in the world of technology. And so, the threat would be that we find ourselves not on the right horse or schedules fall behind and the competitor overtakes us in that way. So, that would be James, I think it’s really more of an execution, we’ll take more of an execution strategy or execution issue than actually the market being there.

James West - Barclays Capital

Okay. So, you don’t see any other disruptive technology that perhaps you don’t have that is concerning you at this point?

Bob Peebler

No, I really don’t, there is technologies out there that are in different stages, but I don’t see anything that we don’t have capability and already have programs in.


Thank you. (Operator Instructions) Our next question comes from the line of Daniel Burke with Johnson Rice & Company. Please go ahead.

Daniel Burke - Johnson Rice & Company

I want to go back to some of the guidance statements offered on the solution segment. Believe you guys talked about doubling the revenue there in a three-year period, which is pretty impressive. I was wondering if you could comment on whether over that three-year period you think you’ll be significantly involved in international onshore opportunities or whether a combination of the domestic onshore, and I guess Arctic and other offshore is enough to get you to that target.

Brian Hanson

Yes Dan, this is Brian. Yes, we actually believe that the offering that we’re developing in North American shales right now is something that we can pick up and move around the world. So we do see participation in international land business.

Daniel Burke - Johnson Rice & Company

Inside of that three-year timeframe?

Brian Hanson


Daniel Burke - Johnson Rice & Company

Okay. That’s helpful. And then, actually you guys went through a lot. Brian, the margin guidance you specifically offered on the solution segment, could you just repeat that one more time for me? I had trouble getting it down.

Brian Hanson

Yes, in general, on the GeoVentures side of the house, over the five-year period, we expect that the margin rates will improve between 20% and 30%.

Daniel Burke - Johnson Rice & Company

The margin percentage will improve by 20% to 25%?

Brian Hanson

As a percentage of improvement, it’ll be a 20% to 30% improvement.

Daniel Burke - Johnson Rice & Company

Okay. And then, a question on some of the statements you made on the outlook for 2012. You mentioned at least two large ticket streamer or OBC systems. Was unclear how to interpret that. Does that mean that you currently have a line of sight on a couple of sales, or is that just what you anticipate you’d be able to expose yourself to? I’m just trying to understand the level of conviction in seeing those two large sales occur in 2012.

Brian Hanson

I think, there is a number of things, first of all, there is an increase; generally, there is an increase in activity in the seabed marketplace. We’ve seen quite a bit of activity in 2011 around projects being sanctioned by oil companies. So we would expect that that will present an opportunity to potentially sell at least a single system in 2012, as you know we haven’t sold one now for a few years. And obviously, each year we’re focused on the towed streamer side of the house as well and we expect that the successes we’ll enjoy with the 12-streamer vessel with BGP will open up future opportunities in 2012 for our towed streamer application.


Thank you. (Operator Instructions) And our next question comes from the line of Thomas Plumb with SVA Plumb Financial. Please go ahead.

Thomas Plumb - SVA Plumb Financial

Hi, I have two questions. It’s basically about profit and revenue recognition. And could you go through the multi-client libraries, how that goes through the income statement, and then to the profit statement? I think you had said that’s going to be a record investment this year. And then, the other is on the revenue and profit recognition from INOVA. It seems to me be atypical for you to be doing that in a quarter in arrears, and I just wanted to see why you do that, and if that’s going to be something that might change in the future.

Brian Hanson

Sure. The first, I’ll address the multi-client revenue recognition issue and quite frankly, the complexity of how the accounting works on that is too great to handle it on a call like this, but it’s a question we get quite frequently. So, I’d point you to the Investor section of our website. We created a white paper on that, which is a few pages and that will walk you through it in a way that you’ll be able to understand it, so, I don’t end up confusing everybody on the call here.

The second is, why we report on a quarterly lag and if you just think about the complexities of a joint venture with a Chinese partner and the work that it takes to close the books, get the books in an acceptable format for U.S. GAAP purposes and then, meet the timing requirements for SEC reporting, it’s just something that is complex and onerous, so, that’s why we have a quarter lag in there to make sure that we don’t miss any of our reporting deadlines.

Thomas Plumb - SVA Plumb Financial

But then, obviously by the time you report, you have a very good idea what the next quarters are going to contain?

Brian Hanson

Yes. If you’ve noticed on our earnings calls, what we do is we give unaudited results for that current quarter. So, the investment community has pretty much the latest information, it’s just that we audited ones that ultimately are consolidated don’t come out for another quarter.


Thank you. Our next question comes from the line of [George Gaspar], a Private Investor. Please go ahead.

[George Gaspar] - Private Investor

Yes. Good morning. I got a question. Can you particularize what is needed to get deeper seismic quality on the onshore market in the U.S. looking at three specific areas, below the existing, mid and lower Bakken Three Forks area, Marcellus, and then in California, for example, where there is some deeper success reported recently in Kern County, which is ranging 12,000 to 13,000 plus ranges. What applications can you point to that are picking up more quality data in deeper levels?

Bob Peebler

Actually those depths would not be considered all that deep, and for geophysical measurement, so the real question at that depth is how do you get better resolution? And what’s happening mainly in those plays is higher-density shooting, and then also what we call as [gimbal] processing, where you’re looking at the variations between the stations versus just the measurements. The other thing that we’re quite optimistic about in the shales is recording the full-wave field. As you know, you’re dealing with fractures and you’re also looking at what we call the brittleness of the rock and trying to tease that out, so we will have a better understanding where to drill the well. And so, we’re really getting good indication that using the shear-wave really is helping to do that.

So, now if you talk about ultra-deep, I would say when you get below 18,000, 20,000 foot or in some cases less than that, you also have to have longer offsets. So, that does mean that you have longer lines that you’re shooting. If you just think of the geometry of that, you need longer lines, the reflections are coming up at an angle, you got to go further out to catch them, if they’re in the deep. There is interest also in low frequency. And so, people are looking for lower and lower frequency where they can do what’s called inversions. So, those are sort of the things that’s going, that is sort of new high-density shooting and long azimuths or long offsets, sort of light azimuths like on land and also reporting shear-waves.

[George Gaspar] - Private Investor

Okay. And if I could on a follow-up, in terms of some of what is being applied in the Bakken formation, and this would be on microseismic from the surface to better determine the extent of the fracking preparations that are going out in the formation to determine how close wells can be to one another. Are you applying any techniques to try to determine that and disclose that information?

Bob Peebler

That’s an area of really strong interest, and if I’d go back and ask, like James asked about the R&D areas, and that’s one area I didn’t mentioned, but obviously we’re interested in microseismic. There is some real need. It’s an unsettled science, that’s why I would describe it that we’re more at the beginning than the end of that area, so you get into all the way from quality assessor, how you make the measurement initially, you’re literally chasing needles in a haystack, the signal, the noise ratios were just really, really make it difficult to detect that signal. So, we’re doing a lot of work in that area, a lot of it is in processing. We think it’s a part of the shale play over time.


Thank you. Our next question comes from the line of James Evans with Collins Stewart. Please go ahead.

James Evans - Collins Stewart

I’m just interested in your comments on where you think INOVA can get to. I mean, what gives you confidence that it can become the market leader and given what you face I guess, just quite strong competition and how much is about quality and how much is about businesses that’s been willing compete on price? And I’m just wondering what that means for your volumes on a four to five year view in that business and how you think the land equipment market evolves and your share within it? And also if you I could ask within that, how do you see the mix of wireless versus cables evolving in the market over the next few years and how do you think about different products position yourselves in terms of relative strength? Thanks.

Brian Hanson

First, I’ll address the overall growth of that business. And then, maybe I’ll have Bob give his thoughts on cable less versus our cable systems. If you go back in time to pre-2008 levels and take a look at the legacy business, which was the ION business at that time and ARAM business, that business at that point in time enjoyed revenues over $400 million a year and it was primarily strong in markets such as North America and Russia. Really markets that today have not yet come back, but will come back. And so, we expect that there is a natural growth rate in that business, just as those markets that we’ve historically been strong in, come back alone.

In addition to that, INOVA has really done a nice job retooling the product offering. So, they not only have taken cost out of their system to make themselves more competitive, they’ve increased the features and functionality of the systems themselves, whether we’re talking about FireFly or we’re talking about the autonomous node system Hawk or even another turn on a cable system. So from a product perspective they’re really well positioned both to compete, both on price and features, but also to improve margins over time in that business. So, we think the combination of their product offering and the association with BGP and BGP strength in the Middle East is very promising for INOVA’s growth.

The legacy business has been one that really hasn’t been able to penetrate that Middle Eastern market. So, BGP in their affiliation, and just the large amount of work they do there, brings a lot to the table to give us access to that market. So, a combination of the markets in the world healing that we have been strong in, a combination of a very competitive product offering, and the association with BGP should certainly improve our overall market share in that business.

Bob Peebler

On your question on wireless. I almost prefer the cableless in that there is several different options. Today we’re seeing a fairly quick expansion in autonomous nodes which really have no we would call them dumb nodes in a sense that they’re basically recording devices and people put them out and basically are recording blind, and then pick them up. That seems to have a strong need in several markets. And so, that’s why our INOVA guys have built Hawk, which they sort of learned from others’ experience and also learned from FireFly. And much of Hawk originates in the FireFly architecture, plus we can take advantage of all the software and crew management and our software call connects. So, we feel really well positioned there.

There is no question in my mind if you run out several years and then you truly probably get into wireless systems where you’re ultimately bringing data back in real time, so it’s almost back to the future in that sense. But I think the technology in that area is still a little bit immature, once you start trying to scale. So, you’ve got the market need that’s wanting more and more data, you’ve got people talking about even up to hundred thousand station to a million stations. And so, to get there, and also do that reliably and commercially in rock solid systems; I think that still a bit off. But it’s a market that’s clearly evolving and it’s going to be an exciting ride to see how it plays out in the industry over the next five to 10 years.


Thank you. And I show no further questions in the queue at this time. And I’d like to turn the conference back to management for closing remark.

Brian Hanson

All right, thank you for taking the time to attend this conference call and we look forward to talking to you during our fourth quarter 2011 call in February.


Ladies and gentlemen, this concludes the ION Geophysical outlook conference call. If you’d like to listen to a replay of today’s conference, please dial 303-590-3030 and enter the access code of 4493646 followed by pound sign. Thank you for your participation. You may now disconnect.

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